Due to falling water levels in the country's major
reservoirs, leading to power shortage is likely to add further pressure
on the GoP kitty. According to official figures, electricity demand
within the country increased by 4.3% from 1999 to 2003. Due to no heavy
dependence on thermal power generation and insufficient availability of
gas most of the plants were forced to use furnace oil. In 2003-04, the
power sector consumed an estimated 3.1 million tonns of furnace oil due
to increased water availability. However, it is believed that in 2004-05
the water situation is likely to get worse. Reduction in water levels
alone is likely to increase dependence on electricity produced from
furnace oilfired plants by about 13.5%. This will, in turn, increase the
power sector's net oil consumption by about the same magnitude. With
high international oil prices, additional fuel bill will result in
widening of the trade deficit. This has the potential to bring
rupee-dollar parity further under pressure.

Currently, Pakistan generates total electricity of
75,682 GwH. The thermal to hydel mix stands at 68:30, in terms of
installed capacity. However, the fact is that about 48% of total
electricity is produced by oil and coal-fired thermal power plants.
Going forward the dependence on furnace oil is expected to increase, due
to growing demand of electricity also. According to initial estimates, a
power shortage of 7,000 Mega Watts is expected by 2010. In such a
scenario, the GoP will face pressure to increase the pace of setting up
new power plants over the next 2-3 years. Although, the LOIs have been
issued for a number of plants, it is very difficult to estimate the time
they may take to commence commercial production.

PLANTS IN THE PIPELINE

PROJECT
NAME

CAPACITY

LOCATION

Star Thermal Power project

123 MW

Jarwar, Sindh

Western Electric Thermal Power Project

150 MW

Karachi

Balloki Thermal Power

400 MW

Balloki

Fauji Korangi Power Project

150 MW

Karachi

Kotli Hydro Power

97 MW

Kotli, AJK

Munda Hydropower

740 MW

NWFP

InterGen Power Project

150 MW

Gurguri, NWFP

Total

1810 MW

Source: PPIB

With very little rainfall in the monsoon season and
less water available from melting of snow, the water level in dams has
fallen to alarming low levels. The Indus River System Authority (IRSA)
warns that the country has virtually entered a drought phase. Water
levels in the Tarbela Dam and the Mangla Dam are 44% and 36% lower than
capacity, respectively. Water levels are also down by 44% and 38% on a
YoY basis, in the Tarbela and Mangla dam, respectively. We believe that
over the next 2-3 years, Pakistan is likely to depend more on thermal
power generation.

Due to limited gas reserves in the country most of
the thermal units are forced to generate electricity by burning furnace
oil. In 2004-05, electricity production from furnace oil fired plants is
expected to go up by about 13.5%, which in turn will increase the net
consumption of furnace oil from the power sector by about the same
magnitude. Based on conservative estimate, furnace oil consumption by
the power sector is expected to go up by at least 7.1% over the next
five years.

IMPACT

During the current financial year, analysts expect an
increase of 6% YoY in the country's import bill due to the increase in
quantity of furnace oil quantity. For FY05, the country's total fuel
bill is expected to amount to US$ 4.14 billion. Out of this the power
sector's fuel bill is expected to be around one billion dollars.
Additional pressure is likely to come from the higher international oil
prices. The cumulative impact will be an increased pressure on the rupee
dollar parity.

While a lot has been said and written about the
adverse effect of growing oil bill, two factors need serious attention
and immediate measures to minimize the adverse impact of rising oil
prices. So far the government has abstained from passing on impact of
rising crude oil prices to consumers. However, if the prices remain at
current levels government will have no option but to raise domestic POL
prices. This can push up the inflation rate to a level that very few
economist can dare to talk about.

Another factor needing immediate attention is the
declining collection of Oil Development Surcharge. In the recent past,
this has been a major source of revenue. The decision, not to pass on
the impact of higher international oil prices to POL consumers, has
brought this collection to the lowest level. The government also cannot
afford to stick to this policy. Many economists strongly believe that a
point has reached, where the government has to make the tough decision
of passing on the impact of higher oil prices to consumers.